OPEC’s war chest for an energy transition is shrinking
Russia’s invasion of Ukraine was good for oil exporters, but not as good as it may at first appear.
War was good for OPEC last year. The group's haul was the highest since 2013, according to one measure — just, as it happens, not the most meaningful measure. A deeper look at OPEC's earnings reveals structural weaknesses and helps explain the oil exporter club's recent efforts to support prices — and why that is so important to de facto leader, Saudi Arabia.
The Energy Information Administration publishes an annual estimate of OPEC oil export revenue, with the latest showing $888 billion for 2022, up 54% from 2021 and a shade over the total for 2014, when oil prices began their mid-decade crash. So much for nominal numbers. In real terms, OPEC's revenue was up 43% from 2021 — still not bad — but down almost a fifth from 2014. Now adjust for population: At $2,035 per capita, last year's figure was 30% below the level of 2014.
The estimate for this year's revenue implies $1,474 per head, down 28% in real terms and actually lower than at the beginning of the century.
Inflation, combined with relatively high population growth — OPEC's has expanded by more than half over the past two decades — stretch the obligations of those dollars. The other factor suppressing revenues is a drop in the number of barrels exported; while the amount increased last year, it remained below pre-pandemic levels and among the lowest of any year so far this century. Indeed, taking all factors into account, 2022's real per capita export revenue is less than in 2009, when global GDP shrank and nominal oil prices were almost 40% lower.
Rival production, most recently US shale, shrinks OPEC's space, both in terms of market share and influence over prices. While it has long been debated as to whether OPEC is a true cartel, the best argument that it is not is that the group periodically seeks new members in order to become a proper cartel. Such was the impetus for creating OPEC+ in 2016.
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OPEC Classic, as it were, is dead. If Russia and a few other frenemies stopped showing up in Vienna, and the plus-sign disappeared, the remaining group would still exist but its ability to control prices, never solid after the 1970s, would be vastly diminished. Why else cross the Russian Rubicon in the first place? OPEC, or rather Saudi Arabia, can still inflict pain by flooding the market. But that carries horrid side effects in a group that relies on oil for more than half its overall export revenue (the median share among members last year was 77%).
The fine art of balancing export volumes with price to optimize revenue has become ever more difficult. An increasing number of OPEC members are well past their prime in terms of productive capacity anyway, hobbled variously by war, sanctions and mismanagement (see this). This undermines cohesion, a point brought out by the gap between haves and have-nots when it comes to per capita export revenue.
At the same time, new factors have crowded in, making the job of 'managing' the oil market even harder. US shale and the mainstreaming of clean technology provide relatively quick responses to higher oil prices, limiting their utility. China's judicious use of stockpiling deploys a kind of monopsony against OPEC's dreams of monopoly.
Plus, there's climate change, portending eventual peak oil demand and thereby pressuring petrostates to diversify their economies. OPEC members are, by and large, on a treadmill of meeting their growing populations' needs with fluctuating oil revenues while also, at least in some cases, trying to fashion an economic transition. The latter, epitomized by such ambitious agendas as Saudi Arabia's Vision 2030, are especially important to the long-term stability of these nations, since an outright decline in oil demand would upset OPEC's entire model.
Saudi Arabia's actions this year reflect all of this. Energy Minister Prince Abdulaziz bin Salman has been notably critical of short sellers this year, attempting to make them "ouch" with surprise announcements intended to jolt oil prices higher. Apart from undermining OPEC's claims to be a force for stability, the success of these production cuts has been short lived. At about $81 a barrel, Brent crude oil is roughly where it was before the surprise supply cut in early April, and only because of another surprise cut this summer. Despite widespread expectation of tighter conditions in the second half of the year, signs of such conditions emerging remain tentative — not least because every Saudi Arabian cut expands spare capacity in the system.
For Saudi Arabia, lower production without the benefit of a significant increase in prices threatens to push last year's fastest-growing G20 economy into recession this year, according to Ziad Daoud, chief emerging-markets economist at Bloomberg Economics. While about 60% of the economy consists of non-oil activities such as services, those are still funded by petrodollar-patronage from the state. In theory, electric vehicles must compete with oil that can be produced for as little as $20 a barrel in Saudi Arabia. In reality, they benefit from actually competing with higher-cost barrels, since Saudi Arabia restricts potential supply in order to earn enough to pay salaries to its many state employees and offer giant contracts to Argentine soccer players.
We are now halfway through the 14 year period between Crown Prince Mohammed Bin Salman's splashy announcement of his effort to shift the economy's fortunes away from oil and its 2030 deadline. Yet fundamental economic progress looks slow. The $500 billion Neom project remains heavy on vaunted prestige but light on discernible purpose (and sits in the shadow of previous unsuccessful grand projects in Saudi Arabia and elsewhere in the region). On one simple metric, there has been regression: Including oil and gas-derived petrochemicals and plastics, oil's broader share of exports was 93% in 2022, higher than in 2015, says Daoud.
The desire to diversify also fuels rivalry and suspicion, as epitomized by occasional flare-ups in the relationship between Saudi Arabia and the United Arab Emirates (including this latest account of clashes in the Wall Street Journal). The UAE has carefully built up Dubai over many years as a finance and tourism hub and has been more effective in attracting foreign capital than its bigger neighbor. While both countries share a desire to maximize oil profits for as long as possible, and maintain regional stability, there is an inherent brittleness to relations centered on two autocrats and their narrow circles. Reported occasional threats by the UAE to leave OPEC cannot be discounted entirely, especially when you look at the glaring differences in economic models and, therefore, how each country chooses to meet the challenges of a decarbonizing world.
As much as the onset of the war in Ukraine offered a taste of those lucrative periods where OPEC could capitalize on disruption, it was also another visceral indicator of wider disruptions. Oil embodied globalization before that was even a term, but the notion of relying on fragile or even hostile nations for life's essentials is fast falling out of fashion. At the same time, climate change is forcing a reevaluation of energy's physical foundations. The volatility inherent to all this will yield more price spikes, no doubt, but the basic challenge remains. OPEC, even its strongest members, must adapt to all this with a checkbook whose pages are being torn out by inflation, demographics and competition.
